Question

Determine whether each of the following is a characteristic of an accrual or a cash basis of accounting.

a. The company received payments for one-year magazine subscriptions throughout the year. On the balance sheet, the company records a liability for Unearned Revenue.
b. The corporation paid for a 12,000, one-year insurance policy beginning in September. The income statement shows an Insurance Expense of 12,000.
c. The firm sold goods for 10,000 to customers and received payments of 8,000 by year-end, with 2,000 still in customer accounts. The company records Sales Revenue of 8,000 on its income statement for these goods.

Answer 1

In summary, recording unearned revenue is an accrual accounting characteristic, as is matching expenses with the related period. However, recognizing only the cash received as sales revenue, despite having sold more on credit, is indicative of cash basis accounting.

Step-by-step explanation:

To determine whether each scenario is characteristic of accrual or cash basis of accounting, we examine when revenue and expenses are recognized.

1. In the case of the company receiving payments for one-year magazine subscriptions, a liability for Unearned Revenue is recorded on the balance sheet until the service is performed. This is an accrual accounting method because it recognizes revenue when the obligation to provide services arises, not when the cash is received.
2. A company that paid for a one-year insurance policy and shows the full Insurance Expense of $12,000 on the income statement despite the service not being fully utilized is also using accrual accounting, as expenses are matched with the period they relate to.
3. When a firm sells goods but only records Sales Revenue for the actual cash received, that is characteristic of cash basis accounting because it only recognizes revenue when the cash is actually received.